THE COMMISSIONER OF INCOME TAX JAIPUR v. PRAKASH CHAND LUNIA (D) THR. LRS. & ANR.

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CHAND LUNIA (D) THR. LRS. & ANR. [M. M. SUNDRESH, J.]

and incurring of penalties is inherent in any unlawful trading or business. So is the risk of conviction and fine. It does not, however, necessarily follow that every kind of damage suffered in such trading falls under the category of commercial loss. It shall have to be held, at any rate, on the authority of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. that the confiscation of property or penalty incurred while indulging in prohibited trading activities does not amount to commercial loss though it happens in fact to be a loss according to the ordinary meaning of the word “loss” as understood in common parlance. Attempt to distinguish the above Supreme Court judgment on the ground that the court was dealing with the claim of the assessee for deduction of penalty under section 10(2)(xv) and not under section 10(1) of the Income-tax Act of 1922 is an exercise in futility. That, in the above case, neither the assessee claimed deduction of such penalty by way of loss under section 10(1) of the Act, nor the Supreme Court D considered it worthwhile allowing the claim under that sub- section is also indicative, if not decisive, of the untenability of such contention. Though deduction was claimed under section 10(1) of the Act, rejection of the claim is based on the broader basis that penalties and confiscations are not the normal incidents of business and do not constitute commercial loss. If E one examines the scheme of section 10(2), and section 24 of the 1922 Act and corresponding provisions of sections 28, 29 to 44A and sections 70 and 71 of the 1961 Act, it will be noticed that the provisions deal with the deductions or disbursement from the profits earned under various contingencies. If the losses are incurred in the same business (source of income) under the same head enumerated under section 14, the same are liable to be deducted under section 22 (section 10(1) of the old Act) of the Act. If losses are incurred under a different source falling under the same head, the losses are liable to be deducted from the income of any other source falling under the same head under section 70. When, however, net result of all sources under any one head of income is loss, the same is liable to be deducted from the income under another head under section 71. If the net result of all sources under all heads is a loss, the same can be carried forward under section 72 of the H

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A Act. Sections 29 to 44A corresponding to section 10(2), clauses (1) to (xvi), deal with deductions or disbursements by way of expenses, etc. These provisions deal with the mode of determining the net taxable profits or income of the assessee. If the true ratio of the Supreme Court judgment is that penalty incurred by infraction of law is not a commercial loss as it is not incidental to trade or business, it matters little as to under what count the deduction or set-off is claimed. That the margin between what is and what is not incidental is very thin has been noticed by the learned judges of the Supreme Court themselves. Ratio of this judgment is applicable to all contingencies where such non-commercial loss is sought to be deducted on any count whatsoever. That the assessee in that case claimed deduction of penalty under section 10(2)(xv) cannot make any difference to the ratio of the case. I do not find it possible to agree with the view of the Punjab High Court. I do not think that the Gujarat High Court’s judgment in Kothari’s case supports its view. On the contrary, the ratio of the two Supreme Court judgments run counter to the ratio of the Punjab case.” Justice Tulzapurkar: E “179. I have already indicated above that in Haji Aziz’s case1 while dealing with penalty or fine imposed in lieu of confiscation of goods, the Supreme Court has observed that the penalty suffered by an assessee for an infraction of law cannot be regarded as incidental to the business and in fact it falls upon the assessee in some character other than that of a F trader. In my view, the aforesaid authorities make the position very clear that before any loss could be claimed as deductible loss under section 10(1) of the Act, it must be a trading loss or commercial loss arising out of carrying on business or it must be incidental to the business and such loss must also fall on the G assessee in his character as a trader. The question in the present case is as to whether the loss consequent upon confiscation of goods for an infraction of law suffered by the assessee could be regarded as a commercial loss or could it be said to be loss incidental to the business and, what is of importance, could it be said to have been suffered by him in his character as a H

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trader? In my view, it is certainly not a commercial loss arising from carrying on of the business nor can it be regarded as incidental to the activity of the assessee as dealer in gold; moreover, it cannot be regarded as loss falling upon the assessee in his character as a trader. It is a loss falling upon him as a person who had infracted law. The loss suffered by confiscation of goods directly sprang from an illegal act committed by the assessee, namely, having acquired gold without requisite permit or permission of the Reserve Bank of India and without having paid any duty for the import thereof into India. Surely, the loss has not fallen on the assessee as a trader or businessman, for, obviously, even a lay person who is not a businessman, if he were to import gold for his private use without requisite permission and without payment of customs duty, would subject himself to the penalty of having that gold confiscated from him and he would as a consequence suffer great loss. It is thus clear that the loss consequent upon confiscation of goods for infraction of law suffered by the assessee must be regarded as loss falling upon him in some character other than a trader. In this view of the matter, I am clearly of the view that the petitioner is not entitled to claim the loss suffered by him as a result of confiscation of the gold in question as allowable deduction while computing his business income under section 28 of the Act.

180. So far as the decision of the Gujarat High Court in S.C. Kothari’s case is concerned—which decision has been confirmed by the Supreme Court— it must be observed that the judgment is an authority only for the proposition that illegality of any business is irrelevant for the purpose of computing the net income thereof under the Income-tax Act and while the revenue is entitled to levy tax on the income of the assessee earned even from unlawful business, the assessee is also entitled to insist on deduction of loss arising out of such unlawful business. There could be no quarrel with this statement of law which has been approved by the Supreme Court. But even there, the loss in respect of which deduction could be claimed while computing the profits of the unlawful business must be a trade loss or commercial loss or loss incidental thereto but suffered by the assessee in his character as a trader and not H

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A loss suffered as a result of confiscation of goods for an infraction of law which would be a loss suffered by him in some capacity other than as a trader. Besides, in S.C. Kothari’s case neither the Gujarat High Court nor the Supreme Court had to consider the question whether the loss suffered by way of penalty or confiscation of goods amounted to commercial loss or not. In B fact, while setting out the facts of the case it has been stated by the Supreme Court in paragraph 1 of its judgment that the loss of Rs. 3,40,000 and odd which was claimed as deductible loss had arisen out of certain transactions entered into by the assessee with different people for the supply of groundnut oil and it was expected by the assessee that those contracts would be performed but owing to certain reasons some of the contracts could not be performed and difference has to be paid. From this it appears clear that the loss of Rs. 3,40,000 which was claimed as deductible loss was clearly in the nature of commercial or trade loss for which deduction was claimed under section 10(1) of the Act. In the circumstances, it is clear that the statement of law enunciated in the case of S.C. Kothari is unexceptionable but, with respect, I would like to point out that the decision is no authority for the proposition that the loss suffered by way of penalty or confiscation of goods amounts to commercial loss that could be deducted while computing the net profits of a business under section 10(1) of the Act. It is true that in Piara Singh’s case, the Punjab and Haryana High Court has taken the view that the confiscation of cash amount of Rs. 65,500 from the assessee, who was engaged in the business activity of smuggling gold, amounted to trade loss and hence was deductible under section 10(1) of the Act. But for coming to that conclusion the Punjab High Court has principally relied upon the decision of the Gujarat High Court and of the Supreme Court in S.C. Kothari’s case, in which, as I have stated above, neither the Gujarat High Court G nor the Supreme Court was required to consider the question whether the loss arising from penalty or confiscation of goods for an infraction of law amounted to trade loss or commercial loss; in fact admittedly the nature of loss suffered by the assessee was commercial since it had arisen on account of payment of differences. With great deference, I am unable to persuade H

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myself to agree with the view of the Punjab High Court A expressed in Piara Singh’s case, especially when it runs counter to the tests laid down by the Supreme Court in Haji Aziz’s case and in English cases to which the Supreme Court has referred while deciding Haji Aziz’s case. The other contention that this loss should be allowed to be set off against the income from undisclosed source under section 70 or section 71 was not pressed by Mr. Albal. In view of the above discussion, on both the points on which there was difference of opinion between the two learned judges I am in agreement with the views expressed by Mr. Justice Deshpande.” 23.3 The decision of the Bombay High Court certainly falls in line with the one rendered in Haji Aziz (supra). The cogent reasons given by taking penalty and confiscation out of the purview of Section 10(1)of the Old Act appears to be the correct view.

24Copy pinpoint24. Commissioner of Income Tax v. Piara Singh,(1980) Supp. SCC 166 D

24.1 This Court did not differ with the view expressed by a co- ordinate bench in Haji Aziz(supra). In fact, it gave its approval to the said decision. However, reliance was placed on S.C. Kothari (supra) by drawing a distinction between an infraction of law committed in carrying out a lawful business, as against one committed in an inherently unlawful business. It was done upon a legitimate anticipation that in an illegal business there will be many pitfalls resulting in expected loss, which cannot be factored into a normal business. 24.2 Law as laid down in Haji Aziz (supra) on both the issues have not been taken note of by inadvertence, particularly the nature of proceedings involved in the imposition of confiscation or penalty, being proceedings in rem. This Court did not have the benefit of the explanation as available under Section 37 of the Act, while interpreting Section 10(2) of the Old Act, apart from ignoring the word of caution mentioned in BadridasDaga (supra). G 24.3 We would only clarify the position that, in any case, the law as laid down in Piara Singh(supra) may not have any application to a case of deduction of expenditure/loss incurred on account of penalty/ confiscation coming under Section 37(1) of the Act, particularly in light of Explanation 1. H

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25Copy pinpoint25. Dr. T.A. Quereshi v. Commissioner of Income Tax, Bhopal (2007) 2 SCC 759 25.1 This Court merely followed Piara Singh(supra) while making a casual observation on Explanation 1 to Section 37 of the Act. The earlier decisions have not been taken into consideration as we could see B in Piara Singh(supra), but the principle laid down was also not taken note of. In this connection, it has to be remembered that for a precedent to be binding there has to be a conscious consideration of an issue involved. The judgment in Dr. T.A. Quereshi(supra) was delivered by a two- Judge Bench while not taking note of a three-Judge Bench decision in Haji Aziz (supra),which has neither been disapproved nor distinguished. C Hence, this decision is per incuriamand not a binding precedent.Once again, the question of a confiscation proceeding being in rem was not brought to the notice of the Court. 25.2 Therefore, there cannot be a situation where an assessee carrying on an illegal business can claim deduction of expenses orlosses incurred in the course of that business, while another assessee carrying on a legitimate one cannot seek deduction for loss incurred on account of either a confiscation or penalty. The interpretation of Section 37 of the Act given by the Court in Dr. T. A. Quereshi (supra) leads to a situation where the expenditure incurred in manufacturing something illegal may not be allowable as a deduction in view of the Explanation 1,however, if upon seizure, the manufactured goodsare confiscated, in that case deduction will be allowable on commercial principles. This classification being artificial not borne out by statute, which mischief is sought to be clarified by the explanation, has no legal basis.

F Conclusion(s)

26Copy pinpoint26. On the abovesaid analysis, the following conclusions are arrived at: I. The word ‘any expenditure’ mentioned in Section 37 of the Act takes in its sweep loss occasioned in the course of G business, being incidental to it. II. As a consequence, any loss incurred by way of an expenditure by an assessee for any purpose which is an offence or which is prohibited by law is not deductible in terms of Explanation 1 to Section 37 of the Act. H

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III. Such an expenditure/lossincurred for any purpose which is an offence shall not be deemed to have been incurred for the purpose of business or profession or incidental to it, and hence, no deduction can be made. IV. A penalty or a confiscation is a proceeding in rem, and therefore, a loss in pursuance to the same is not available for deduction regardless of the nature of business, as a penalty or confiscation cannot be said to be incidental to any business. V. The decisions of this Court in Piara Singh (supra) and Dr. T.A. Quereshi (supra) do not lay down correct law in light of the decision of this Court in Haji Aziz (supra) and the insertion of Explanation 1 to Section 37.

27Copy pinpoint27. In view of the aforesaid discussion, I am inclined to hold that the appeal of the Revenue deserves to be allowed, though conscious of the fact that Section 115BBE of the Act may not have an application to the case on hand being prospective in nature. Accordingly, the judgment &order dated 22.11.2016 passed in DBITA No. 96/2003 & DBITR No. 6/1996 by the High Court of Rajasthan at Jaipur stand set aside. No costs.

E Divya Pandey Appeals allowed. (Assisted by : Abhishek Pratap Singh and Shevali Monga, LCRAs)